Dropping the middle class

With the approach of the 2019 general elections, it wouldn't have been clever to shower favours on India's tiny middle class.

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Ashok V. Desai

February 9, 2018

ISSUE DATE: February 19, 2018

UPDATED: February 13, 2018 08:58 IST

Illustration by Siddhant Jumde

The poor are those who are not rich or middle class. Middle class is an intriguing concept; it sits awkwardly between the rich and the poor. It really belongs to Europe, and especially to Germany, whose Mittelstand has displayed important political and economic virtues. It was the product and pioneer of economic enterprise, a bulwark against royal tyranny, and subsequently the backbone of state finances. It dominates most West European countries, where prosperity and progressive taxation have depleted the numbers of the rich and the poor.

A similar middle class was on the point of emergence from business and bureaucracy in British India, but socialist policies after independence squeezed it and taught it to keep its head down. They were relaxed after the reforms of 1991. But showing off wealth can have dire consequences even now. Those who have watched the fate of Sudipto Sen and Subrata Roy may think they deserved what they were served, but the difference between them and a thousand others who have flourished is that the rest kept their heads down.

The opprobrium attached to success has, however, weakened-faster in some states than in others. It vanished early in Gujarat; it always had a large business class, which got down to chasing success. It did especially well in the regime of chief minister Narendra Modi. He earned its admiration and affection, and the pecuniary favours it showered on his party helped it fight the general election of 2014. His face beamed at the electorate from hoardings to the left, right and centre.

He has not explicitly shown affinity with the middle class, but his campaign to 'Make in India' clearly requires it to take the lead. His calls to the youth are also implicit invitations to join the middle class. And a good deal of what his finance minister has done was designed to help the middle class. In his first budget, he gave tax breaks to savings for old age and health insurance. Last year, he reduced income tax in the lowest bracket as well as capital gains tax on property. The tax exemption he gave to builders of small flats was designed to make housing cheaper for new investors in property, many of whom would also be new entrants to the middle class. This year, he has given tax concessions to salaried persons, small and medium enterprises, and people saving for old age.

However, it is not electorally clever to shower favours on the middle class. Compared to the richer countries, India's middle class is tiny. With the approach of the 2019 general elections, the finance minister became conscious of the call of populism. Unfortunately, his predecessors were under the same compulsion, and they gave so many sops to the poor that he could not find anything to add. Then he remembered a sop he had promised in his 2016 budget and then forgotten. So he repeated a promise to pay the medical costs of the poor up to Rs 5 lakh.

The primary weakness of this proposal has been brought out by Mita Choudhury of NIPFP (National Institute of Public Finance and Policy)-that it would cost at least Rs 1 lakh crore to implement. Thus, it joins the many dormant schemes of the finance minister, who happens to be a master of promise, promise, do nothing. I would like to ask how a more dedicated and realistic finance minister would proceed to achieve the same objective. First of all, he would give a subsidy to clinics situated in villages and urban slums, where the poor live. Second, he would give a substantial income subsidy to medical staff working in those clinics. Third, he would subsidise travelling clinics-buses that would carry doctors, nurses and basic medicines regularly to villages. Finally, he would subsidise the training of paramedics and nurses, so that they would multiply and spread out into the countryside. Subsidising the sick is inefficient: they would have to prove to some authority that they are sick and poor, which would create considerable scope for corruption and arbitrariness. The way to cheapen healthcare is not to subsidise the patient, but to subsidise medical services and increase their supply.

Ashok V. Desai is a former chief economic advisor

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